The Wrap: Oz Dollar, Radiology & Retailers

Weekly Reports | May 31 2019

Weekly Broker Wrap: Australian dollar; radiology; chemicals; aquaculture; food retailers; department stores; and telco/fibre infrastructure.

-Potential for substantial weakness in Australian dollar exists
-SaaS models underpin heightened interest in radiology services/informatics
-Downside risk for Incitec Pivot and Nufarm amid inclement US weather
-Australian salmon market expected to be balanced in FY20
-Woolworths and Coles best positioned to leverage competitive advantage via digital
-Traditional department stores need to cut costs or lift productivity
-Telco/fibre infrastructure sector retains high strategic value


By Eva Brocklehurst

Australian Dollar

The Australian dollar has dropped below US$0.70, the trough ANZ analysts had previously forecast for this cycle. The global outlook has deteriorated and this no longer provides a buffer to the inevitable reduction in Australian cash rates. Hence, the trough in forecasts is lowered to US$0.65. ANZ analysts had expected US/China trade tensions would ease and improve the external outlook but this is escalating and the likelihood of a resolution is diminished.

Hence, the potential for substantial weakness in the Australian dollar exists. Recent indicators have shown there is a risk Australia's unemployment rate will rise and that the cash rate is likely to be 1% by the end of 2019. As a result the yield structure on the Australian dollar has significantly changed. While two reductions to official interest rates in the next 12 months are largely priced in, the analysts do not believe this will stall the decline.

External conditions will be the next catalyst for weakness. The analysts believe the recent run of disappointing US data is an issue for risk appetite rather than for the US dollar. An environment of weaker growth and heightened uncertainty suggests the Australian dollar should decline further.


There has been a significant increase in the price and turnover for a number of ASX-listed companies with direct exposure to radiology services/informatics. A contributing factor, Morgans believes, is interest in the use of software-as-a-service (SaaS) revenue models, which create a trackable metric that can be ascribed value, among others such as profitability and gross margins.

The long-term drivers of this include artificial intelligence, ageing populations, a focus on better patient outcomes and regulatory requirements for centralised records. Global market estimates for medical imaging analysis software, the broker cites, were around US$2.4bn in 2016, expected to be growing at an 8% compound rate through to 2024.

Morgans highlights four companies with direct radiology exposure on which it is keeping a close eye. These include Pro Medicus ((PME)), Volpara ((VHT)), ImExHS ((IME)) and Mach7 ((M7T)). Strong growth, at Pro Medicus and Volpara in particular, has a number of years to play out.


Wet weather and a switch to soy from corn plantings, as well as insurance pay-outs, are resulting in lower urea demand in the US and JP Morgan believes this is negative for Incitec Pivot's ((IPL)) Dyno Nobel Americas business. Total corn and soybean plantings as of May are below historical averages and present downside risk, if weather worsens, for Nufarm ((NUF)) as well.

The broker also notes diammonium phosphate prices, currently at US$375/t in India, are being supported by a drop in Tampa ammonia prices, with margins benefiting by around US$24/t.


Tight supply domestically and strength in demand have supported high prices in the salmon industry. Credit Suisse expects the market should remain balanced in FY20, assuming Tassal Group ((TGR)) keeps volumes flat, albeit with a higher domestic contribution, and Huon Aquaculture ((HUO)) increases tonnage by around 6000t.

Tassal expects a more gradual growth curve in salmon and this suggests that its FY20 growth will be reliant on prawns. Management's strategy is considered well constructed, although Credit Suisse acknowledges risks to forecasts, given the relative immaturity of the business and timing risk, as the earnings from prawns will be skewed to the second half.

Meanwhile, Huon Aquaculture has experienced earnings volatility recently, although a recovery in harvest volumes should drive a strong recovery. The broker retains Neutral ratings on the stocks for now, inclined to wait a little longer to obtained a better understanding of the risk profile.

Food Retailers

Credit Suisse considers Woolworths ((WOW)) and Coles ((COL)) are positioned to leverage their digital capabilities and establish a competitive advantage in the food retail value chain. Promotional expenditure comprises 20% of the food retail value chain and there are material efficiency gains to be had through targeting consumers with promotional expenditure.

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